Clause 105
Company Law Reform Bill [Lords]
2:45 pm
David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)
The subject of the clause sounds similar to the issues just discussed, but in fact it is fundamentally different. Clause 105 is about the re-registration of unlimited companies as limited. The clause changes the existing law, but only in respect of public companies. The point that I wish to raise is more fundamental.
Unlimited companies are not very common, but they do occur in the financial services sector. The point of an unlimited company is that its creditors have recourse to the private wealth of the shareholders in the event that the company cannot meet its debts, so unlimited status is a way of attracting customers to a business in certain circumstances, because, in effect, the shareholders are underwriting that business. Given equivalent circumstances it makes the company a more attractive body to deal with than a limited company in the same circumstances.
Clause 105 allows unlimited companies to re-register as limited companies, thereby reducing the liability of the shareholders—perhaps dramatically—without any consent from the creditors. The fundamental issue is the balance of interests between creditors and shareholders, and that balance is very different in an unlimited company compared with a limited company. The amendment is therefore intended to test the proposition that creditors’ interests must be taken into account when a company moves from unlimited to limited status.
I do not want to give the impression that there is a lot of malpractice or fraud in this area at the moment, but there is a risk. It might be argued that the provision has been in place for a long time without any particular problems. However, in Tuesday’s sitting I mentioned the case of Equitable Life, which was an unlimited company. The circumstances of that case were different in that Equitable Life did not have shareholders in the same way, so the issues did not arise in precisely the same manner as I am suggesting today. Nevertheless, that example shows that there are large undertakings that are unlimited companies. There is a serious potential problem, and it would be just as well for us to consider it and try to provide for it before it turns into a real-life case.